I Just Made This Tax-Free “10% Trade” with General Electric (GE)

[stextbox id=”info”]Please keep in mind that these “10% Trade” alerts are for information purposes only. We’re not registered financial advisors and these aren’t specific trade recommendations for you as an individual. Each of our readers have different financial situations, risk tolerance, goals, time frames, etc. The ideas we publish are simply ideas that we feel fit our specific needs and that we’re personally making in our own portfolios. You should also be aware that some of the trade details (specifically stock prices and options premiums) are certain to change from the time we make our trade to the time you’re alerted about it. So please don’t attempt to make this “10% Trade” yourself without first doing your own due diligence and research.[/stextbox]

[hana-code-insert name=’adsense-article’ /]General Electric (GE) is a stock I’d be happy buying at a reasonable price and holding for the long haul.

I won’t go into all the details now as to why I’m willing to give this former Dividend Champion a second chance, but since its dividend cut in 2009 the company has already raised its payout six times.

And with a payout ratio of just 60%, there should be plenty of room for continued dividend growth in the future as well.

On top of this, the stock pays solid income too: anyone who buys today can lock in a 3.5% annual yield.

"10% Trade" with General Electric (GE)That’s not bad, but what if I told you that it was possible to collect a 14.6% annualized yield without even owning the stock?

I realize that may sound far-fetched, but that’s exactly the “10% Trade” opportunity I was looking at on Friday with shares of General Electric (GE)… so I didn’t hesitate to pull the trigger.

At the time, GE was selling for $25.28 per share and the May 17, $25 puts were going for $0.68 per share.

My “10% Trade” involved selling two of these puts… and there are only two possible ways this trade will work out.

On one hand, I’d get to generate a 14.6% annualized yield from GE without even owning a single share of the stock. On the other hand, I’d get to buy GE at a 3.5% discount to what it was trading for at the time I executed the trade.

Since double-digit income is a no-brainer — and since I’m interested in owning GE at a good price anyways — either scenario works for me.

Let’s take a closer look at how these scenarios will play out…

Scenario 1: GE falls below $25 by May 17
If GE falls below $25 by May 17, I’m obligated to buy 200 shares at $25 per share. That’s cheaper than the $25.28 price the stock was trading for when I sold the puts.

In exchange for my agreement, I was paid an instant $136.00 (200 shares X $0.68 per share) before commissions. This money was deposited into my account immediately.

Taking this income into consideration – and subtracting out the commissions – my cost-basis drops to $24.40 per share.

That’s a 3.5% discount to the $25.28 share price that GE was selling for at the time I made this trade.

So in “Scenario 1” I get paid instant cash while waiting to buy GE at a discount. I’ll take it!

Scenario 2: GE stays above $25 by May 17
If GE stays above $25 by May 17, the contract expires worthless and I get to keep the $136.00 in income (before commissions).

After commissions, this works out to a 2.6% return on what my purchase obligation would have been ($0.68 / $25) in just under 9 weeks.

If I can repeat this trade over the period of a year I could generate a 14.6% yield from GE without ever owning the stock!

And since I made this trade in my Roth IRA, when it comes time for me to withdraw, any income generated will be tax-free on the federal level. 

This is just one more example of the power of a “10% Trade.”

I’ll continue to keep you posted as I make these trades, but please keep in mind that these aren’t intended to be specific recommendations. Everyone has different financial situations, risk tolerance, goals, time frames, etc.

Instead, I’m sharing these real-life, real-money “10% Trades” as examples — so you can see for yourself how it’s entirely possible to safely double… triple… or even quadruple your yield on some of the best companies in the world.

Greg Patrick

P.S. I realize the average financial advisor may think it’s crazy to trade individual stocks in a retirement account… no matter how safe the stocks appear. And in many cases they’re probably right — especially if you’re not properly diversified and you’re heavily dependent on the income from this account. So I urge you not to blindly follow my lead today without first speaking to a professional advisor or doing your own due diligence and research.

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